An in-depth examination of what it means when a money market fund's NAV falls below $1, causing significant implications for investors and the financial market.
“Breaking the buck” refers to an event in which the net asset value (NAV) of a money market fund falls below the usual $1 per share. This deviation signifies that the fund’s assets have decreased in value to a point where they no longer maintain the stable $1 NAV, typically due to severe losses or insufficient investment income to cover operating expenses.
Money market funds are typically considered low-risk investments, often utilized by individuals and institutions for their perceived safety and liquidity. Historically, these funds aim to maintain a stable NAV of $1 to provide stability and predictability. The first notable instance of “breaking the buck” occurred in 2008 when the Reserve Primary Fund’s NAV fell to $0.97 amid the financial crisis, leading to widespread panic and a run on money market funds.
A substantial decline in the value of the fund’s investments, such as default on securities or significant market downturns, can cause the NAV to drop:
If the return on the fund’s investments is insufficient to cover its operating expenses, the NAV may also decline:
A drop below $1 can erode investor confidence, prompting redemptions and potentially exacerbating fund instability.
Post-2008, regulatory changes such as the SEC’s Rule 2a-7 have been implemented to increase transparency and reduce the risk of breaking the buck.
The Reserve Primary Fund’s NAV fell to $0.97 on September 16, 2008, due to losses on Lehman Brothers’ commercial paper, sparking a large exodus from money markets.